Watch Out for 'Junk' Mortgage Fees

It's easy to pay too much in mortgage fees. Watch for these 5 fees..

For most people, buying real estate is an uncommon occurrence. Engaging in a real estate transaction just once or twice in a lifetime provides little opportunity to become intimately familiar with the process. There are mountains of paperwork to sign, a confusing new vocabulary to deal with, and a host of fast-talking sales people—from real estate agents to mortgage brokers—who smile, point, and tell you where to sign.

Somewhere in the mix of elation at purchasing a property and boredom from signing forms, it's easy to lose track of what you're paying for and how much you're spending. Aside from the amount of the mortgage, most of the other expenses get lumped into a category referred to as closing costs. Paying attention to these costs before you get to the closing can help you understand where your money is going and maybe even save you a few hundred dollars.

Key Takeaways

Recurring closing costs are expenses like real estate taxes that you pay at closing and each month thereafter; nonrecurring closing costs are one-time payments like points, loan fees, and home inspection fees.

Consult Your Home Loan Toolkit, from the Consumer Financial Protection Bureau, to evaluate the fees in your area.

Be on the lookout for excessively high application, underwriting, mortgage rate lock, and loan processing fees, and for broker rebates.

Closing Costs: What Are They?

The phrase "closing costs" is shorthand for the total cost of several dozen potential expenses associated with purchasing and financing real estate. These expenses can be categorized as "recurring" and "nonrecurring."

These expenses must be funded in advance at the time of purchase, which is done by putting them into an account so that they are available to cover the next year's obligations. This is known as putting the money in escrow. Depending on your closing date, it may also be necessary to prepay interest to cover your first few days or weeks in the home.

If any of these fees seems to be unusually high, ask about them, as they can often be negotiated. This advice applies to other fees as well. If it looks funny, ask about it. Often, the mere act of questioning the fee will result in the fee being lowered or eliminated.

Some lenders now offer all-in-one, flat-rate fees that include closing costs.

All-In-One Closing Cost Pricing

Realizing that consumers are overwhelmed by the fees and frustrated at the process of trying to determine whether the fees are fair, some lenders now offer all-in-one, flat-rate fees that include all closing costs. The "all-in-one" terminology is also used to describe other mortgage products, such as mortgages that are tied to checking accounts, so take care when you're shopping for these products that you purchase the one that applies strictly to mortgage closing costs and not to other banking relationships or products.

As a general rule, you can expect to spend from 3% to 5% of the price of the property in closing costs.

Minimize the Pain

If the real estate market in your area is favorable to buyers, you may be able to ask the seller to pay closing costs. If that isn't an option, getting an all-in-one mortgage is probably the best way to minimize the feeling that you are being taken advantage of during the closing process. While you are still paying the fees, you won't need to despair over them one fee at a time.

Comparison shopping is another way to get comfortable with the process and get a better feel for the costs. Ask half a dozen lenders to provide loan estimates and compare the results. This will help you learn the terminology and get a sense of the range of closing fees in your area. Once you choose a lender and have a loan estimate in hand, save it. It will come in handy later.

The Bottom Line

The official form that includes a breakdown of all closing costs is called a closing statement. You have a right to see the closing statement document 24 hours in advance of closing. Ask for it and compare it to the loan estimate. If the numbers aren't reasonably close, ask questions.

By spending the time to comparison shop and by carefully reviewing all documentation in advance, you can minimize the expense and anxiety associated with the closing costs you incur when purchasing real estate.